Dimon warns private credit crisis will hurt retail investors most

JPMorgan Chase chair and chief executive Jamie Dimon says while the current private credit crisis does not pose a systemic risk, retail investors will be among the worst affected should 'anything go wrong'.

In his annual letter to shareholders, Dimon pitted the size of the US$1.8 trillion private credit market in the US against the US$1.5 trillion US high-yield bond market, and the bank syndicated leveraged loan market of US$1.7 trillion.

"Taking a wider view, the total market size of investment-grade bonds is US$13 trillion. And the total market value of all residential mortgage securities and loans is also US$13 trillion. In the great scheme of things, private credit probably does not present a systemic risk," he wrote.

Dimon pointed out it will be retail investors exposed to private credit that will likely be hit harder than institutional investors.

While they would have been told about the risks, retail investors will seek remedy in the courts "if anything ever goes wrong."

"Additionally, anything that gets sold to retail investors as opposed to institutional investors requires greater transparency, higher standards and fewer potential conflicts," he said.

However, Dimon argued the private credit sector tends not to have great transparency or rigorous valuation marks of their loans, thus increasing the chance investors will sell if they think the environment will get worse - even if actual realised losses barely change.

"Additionally, actual losses right now are already a little higher than they should be, relative to the environment," he said.

If interest rates or credit spreads ever go up, he said, the companies that borrowed will have to borrow at even higher rates, putting them under even greater stress.

"However this plays out, it should be expected that at some point insurance regulators will insist on more rigorous ratings or markdowns, which will likely lead to demands for more capital," Dimon said.

He warned asset management firms to abide by their fiduciary responsibility to make sure the loans are suitable for that specific fund.

"Those who do not do this properly are likely to get into trouble," he said.

Dimon added that it "has always been true that not everyone providing credit is necessarily good at it."

"There are many players who are late to this game, and it should be expected that some credit providers will do a far worse job than others. We have not had a credit recession in a long time, and it seems that some people assume it will never happen," he said.

In his annual letter to investors, BlackRock chief executive Larry Fink doubled down on private markets opportunities, saying the fund manager aims to raise US$400 billion from infrastructure, private credit and alternatives by 2030.